Dis-Oriented Markets

By

William Pesek Jr.

July 27, 1998 12:01 a.m. ET

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T he domino theory has been fulfilled. But instead of Asian countries falling to the communists, as was feared a generation ago, their currencies have been toppled in succession. Beginning when Thailand effectively devalued the baht just over a year ago, the currencies of its neighbors have tumbled in a devastating chain reaction that has produced a near-depression in what had been the fastest-growing economies on the globe.

Rather than any light at the end of the tunnel, as the American military claimed to have sighted so many times during the Vietnam war, Federal Reserve Chairman Alan Greenspan last week told Congress that the Asian crisis "has shown no evidence of stabilization at this point." This after International Monetary Fund bailouts totaling $100 billion which, according to Treasury Secretary Robert Rubin, leaves the IMF with a "paucity of funds."

The turmoil that was supposed to be simmering down by now, just as Mexico's did a year ago, is instead getting worse. And Rubin, who's had an impressive run as Treasury chief to date, is caught smack in the middle. He and his deputy, Lawrence Summers, have treaded risky ground with Asia's crisis. The pair, together with the IMF, have imposed the orthodox prescription for balance-of-payments crises: tight monetary policies and balanced budgets to entice fleeing investors to return capital to the region's humbled currencies. Once funds flow back to Asia, they reason, interest rates will edge lower as currencies recover. Before long, stability will be restored, as it was after the Mexican peso crisis in 1995.

But things haven't gone as planned, and it is these very policies that have become the great debate topic of the Asian crisis. What has become painfully apparent to Rubin is the rising tide of anger in Asia that the IMF's reform policies-over which the U.S. Treasury has enormous influence-are doing more harm than good. The charge is that the IMF's demands that countries keep interest rates high and slash government spending are strangling otherwise healthy businesses, shrinking national economies and paving the way for a deepening of Asia's problems. The economies of Thailand, Indonesia and Korea contracted in the first quarter, and analysts say they are falling into severe recessions and worse. Indonesia has seen riots and acts of genocide against ethnic Chinese, who are made scapegoats for the crisis.

One year into the region's transition from economic miracle to basket case, Rubin finds himself on center stage more than he'd like, a position that's less and less comfortable as the Asian flu shows signs of intensifying. And the pressure has never been greater than during Rubin's recent whirlwind tour of the region. Part fact-finding mission, part morale booster, the unambiguous message of Rubin's journey is that Asia must restore financial stability and rebuild sound economic fundamentals through painful reform.

Everywhere, Rubin acknowledges, the region's serious problems will take time and suffering to correct. By sticking to IMF bailouts aimed at stabilizing currencies and reforming banking systems, he argues, Asia will eventually emerge from the crisis and prosper again. But his optimism offers little comfort to many Asians, who believe the cure has worsened their pain, or to those who charge the U.S. is pushing for structural changes in Asia in Wall Street's interest, so that foreigners can buy local assets at fire-sale prices. Rubin, however, goes out of his way to stress that the West isn't trying to "recolonize" Asia, as Malaysian Prime Minister Mahathir Mohamad has charged.

When the U.S. orchestrated a bailout for Mexico more than two years ago, officials there rapidly implemented the reforms and restored confidence to the peso. But in Asia, getting officials to stick with IMF programs has been a struggle for Rubin.

To hear Rubin and the IMF tell it, Asia has probably seen the worst of the 12-month-old crisis. Slowly but surely, they counsel, leaders and financial policy makers here are taking the bitter medicine needed to nurse their sick economies back to health. But this doesn't tell the full story. In their public comments about Asia, Treasury officials seem extraordinarily guarded. Even over a relaxed dinner, they are reluctant to say more about the region's prospects than vague statements about how Asian officials "seem to recognize" what needs to be done to fix their economies, stopping short of characterizing how the implementation process is going. But their restrained commentary, in light of what their eyes tell them, may be a message in itself.

Indeed, the view on the ground throughout Southeast Asia tells a far different story, one of financial devastation that only now is filtering down to Main Street, and one that many investors on Wall Street may not be hearing about.

Consider the most basic of anecdotal evidence: traffic. Cities like Bangkok, Seoul and Kuala Lumpur are famous for horrendous traffic jams that shock even New Yorkers. But on a swing through the region with Rubin & Co., it's the absence of vehicles on the road -- a product of surging gasoline costs and rising automobile repossessions -- that surprises his entourage, the first indication that the region's commercial environment has changed. The idle cranes decorating the city skylines, the empty office buildings and all the newly available retail space bear this out as well.

A year ago, IMF head Michel Camdessus and his deputy, Stanley Fischer, assured the world that Thailand's devaluation of the baht wouldn't lead to an Asia-wide crisis. Twelve months of turmoil later, it's easy to see how flat-footed the IMF was caught by the transition of Asian economies from tigers to pussycats.

In retrospect, it's apparent what brought Asia's fastest-growing economies to their knees, and how devaluations in currencies have devastated businesses and families, driving unemployment to historic highs. Huge flows of foreign capital overwhelmed developing economies' abilities to absorb the money prudently, creating unsustainable bubbles in real estate, stocks and other asset markets. When things started going sour, that hot money fled, leaving the IMF to fill the breach. But with lenders and borrowers alike virtually tapped out, these once-vibrant economies are constrained by a massive credit crunch that hampers recovery.

The Asian flu also has spread far beyond the region, taking its toll on far-off economies, from South Africa to Russia to Brazil to Singapore. Asia's two largest economies, Japan and China, also have been hard-hit by the crisis in the rest of the region. Japan's woes, while largely home-grown, are exacerbated especially by its already beleaguered banking system's exposure to the rest of Asia. And China's export-driven economy is slowing, raising the specter of a devaluation of the renminbi, which would almost certainly set off a new round of currency crashes. And as Greenspan noted and the stock market took to heart last week, the effects of the malady have begun to be felt by the U.S. economy and by American corporations.

Now more than ever, Rubin believes that developing countries need smooth-functioning financial markets and carefully supervised financial institutions to channel money to productive investments, as opposed to politicians' favorite projects or those of their cronies. The trouble is getting to economic policy makers in Asia, who have to balance the interests of their own constituents with the demands to create financial systems that command the respect and confidence of investors worldwide.

"Following America's advice hardly proved to be in the best interests of Indonesia, or at least President Suharto," observes Lawrence Lindsey, former Federal Reserve governor, now with the American Enterprise Institute.

To Rubin, his detractors -- who include Jeffrey Sachs of Harvard and former White House economist Martin Feldstein -- lack an appreciation of the complexities involved in restoring confidence to Asia. His gut tells him that looser monetary policy would increase the risks of further currency depreciation, which would boost inflation, discourage capital investment, encourage capital flight and greatly exacerbate the problem of repaying dollar-denominated debt.

And clearly, there are some positive signs. The Thai baht and Korean won are up sharply against the dollar this year, albeit after having been demolished in 1997. The dollar is now trading at roughly 40.90 baht, compared with 48 at the start of the year. Now changing hands at 1,290 won, the dollar was trading at 1,695 at the beginning of 1998. But things haven't gone as well for the Indonesian rupiah or Malaysian ringgit. The dollar is now trading at 13,744 rupiah versus 5,600 at the start of the year. And U.S. currency is changing hands for 4.1525 ringgit these days, compared with 3.8925 at year-end 1997.

Thailand has made great strides in dealing with the financial and economic strains gripping Asia, and so far has avoided the kinds of social unrest that have descended upon Indonesia, the political dissension plaguing Malaysia and the labor revolts filling the streets with angry workers in Korea.

Nowhere are the views of Rubin and the IMF more controversial than in Kuala Lumpur, where Prime Minister Mahathir vocally blames everyone from currency speculators to the U.S. government for trying to ruin his economy. But he isn't alone in his criticism of the IMF. Although P.K. Lim, chief executive of Multipurpose Bhd., a Malaysian banking and construction company, says the IMF's work in closing poorly run, insolvent companies makes perfect sense, he still muses: "After all that, where's the money? An economy cannot work without liquidity."

In Seoul, U.S. officials come up against similar concerns. They also have run-ins with Korea's militant labor unions and mighty chaebols (giant conglomerates), shaking their heads after exiting a meeting with the latter. Still, Rubin manages to leave with fresh assurances that Korea will stay the course on reforming its economy, the world's 11th-largest.

More than one year into Asia's crisis, there's no light at the end of the tunnel. And whether the reforms pushed by the IMF and the U.S. Treasury are seen as the villains that caused widespread suffering or as a catalyst for constructive change depends on what happens over the coming months.

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